Choosing the Proper Business Entity

Whether you are an entrepreneur taking the first step on your journey or an experienced business-owner, make sure the type of business entity you are using is well-suited to your needs. Much of the information on this page is also available in PDF format from our Document Library, including our brochure on Choosing the Proper Business Entity.

Sole Proprietorship

A sole proprietorship is a business that is owned and operated by one person. The owner is entitled to all profits of the business, but is also personally liable for all obligations. A sole proprietorship is considered the simplest form of business entity because few formalities are required.

A general partnership is formed when two or more people co-own a business for a profit. A written partnership agreement is not required, but it is a good idea. The partnership agreement governs the amount of control each partner will have and also how the partners will share profits or losses. Typically each partner is jointly and severally liable for all obligations of the partnership. Each partner is responsible for the income taxes on his share of partnership profits.

A limited partnership is a partnership formed by two or more people with at least one general partner and at least one limited partner. The general partner controls the management of the business and is usually liable for all obligations of the partnership. The limited partner is usually only an investor and has limited liability. For tax purposes, limited partnerships act like general partnerships, where each partner pays personal income taxes on his or her share of the partnership profits. A limited partnership must be registered with the State Corporation Commission, but has no additional record keeping requirements.

A corporation is a legal entity that is separate from its owners, the shareholders. A corporation typically consists of directors, officers, and at least one shareholder, each with different levels of responsibility, legal duty, and control. Corporations are formed by filing articles of incorporation with the State Corporation Commission and have strict record keeping requirements. A corporation must comply with federal laws and the laws of each state in which it conducts business. The manner in which business profits are taxed depends entirely on the structure of the corporation.

A Limited Liability Company (LLC) is a separate legal entity that has one or more owners, called members. The liability of the owners is generally limited to their investment. LLCs have few record keeping requirements, but should have an operating agreement and must file articles of organization with the State Corporation Commission. LLCs offer tremendous organizational flexibility and can be taxed like corporations or partnerships.